Systems and methods for controlling traders from manipulating electronic trading markets

ABSTRACT

Systems and methods are provided to control gaming in electronic trading markets. These systems and methods alleviate the problem of a seller or buyer trying to act on a trader&#39;s original bid or offer only to trade at an unfavorable level after the trader changes the bid or offer. A pricing method suspends trading for a period of time if a price difference between two bids or offers by the same trader is too great. A timing method prevents a trader from canceling or replacing a bid or offer for a period of time. These methods provide a more fair and efficient way of executing electronic trades.

BACKGROUND OF THE INVENTION

[0001] This invention relates to electronic trading markets. Moreparticularly, this invention relates to ways to control the extent towhich traders can manipulate electronic trading markets.

[0002] As electronic trading becomes more popular, there is anincreasing need to control the extent to which traders can manipulateand abuse electronic trading markets. Currently, the trading offixed-income securities, such as United States Treasuries, UnitedKingdom Gilts, European Government Bonds, and Emerging Market debts, andnon-fixed income securities, such as stocks, is possible throughelectronic trading systems.

[0003] In one method of electronic trading, bids and offers aresubmitted by traders to a trading system. A bid indicates a desire tobuy while an offer indicates a desire to sell. These bids and offers arethen displayed by the trading system to other traders. The other tradersmay respond to these bids and offers by submitting sell (or hit) or buy(or lift or take) commands to the trading system. Once a bid or offerhas been responded to by a sell or buy command, a trade has beenexecuted.

[0004] Electronic trading can be conducted over any suitablecommunication system. For example, networked computers can be used toimplement a trading system. Traders can submit bid, offer, hit, or liftcommands via any suitable input device, such as a mouse, keyboard, orany other suitable device.

[0005] Electronic timers are sometimes used in electronic tradingsystems. In certain systems, a “trade-state” timer may be used toprovide a period of exclusivity for two traders (called “currentworkers”) who are “working-up” a trade—i.e., adding size to a pendingseries of trades. This trade-state timer may be set to a predeterminedtime period. For example, for U.S. Treasuries, the trade-state timer maybe set to twelve seconds. During a work-up trade, the current workersmay have a right of first refusal to trade at a certain level. A currentworker may submit a bid or an offer anytime during this trade state.However, during this period, no other trader may submit a bid or offer,or respond with a sell or buy command.

[0006] In some systems, “bid-offer” timers may be used to preventtraders from prematurely canceling bids and offers entered by thetraders. The timers may give other traders an opportunity to respond tothe bids and offers before they can be cancelled by the traders thatsubmitted them. The timers may be set to a predetermined period. Forexample, in U.S. Treasuries, the bid-offer timer may be preferably setto four seconds. The bid-offer timer may begin when a trader hassubmitted a bid or offer to the trading system.

[0007] When these timers are used together in an electronic tradingsystem, a bid-offer timer may begin when a current worker submits a bidor offer during a work-up trade. The submission of the bid or offer maybe timed so that the bid-offer timer expires just prior to the time thatthe trade-state timer expires. Immediately upon expiration of thetrade-state timer, the former current worker may then replace thecurrent bid or offer with a lower bid or offer. At the same time,another trader may submit a sell or buy command in response to thecurrent worker's first bid or offer. Since the current worker hasreplaced the first bid or offer, the new trader may unintentionally endup selling or buying at a different level than was expected. Bycanceling the earlier bid or offer and submitting a new bid or offer inorder to deceive the new trader, the current worker is said to be“gaming” the market.

[0008] Many current trading markets allow traders to “game” the market.As explained above, one form of gaming is done by submitting a bid oroffer to the market only to quickly replace it with a new bid or offer.This can be accomplished by manipulating the market timers.

[0009] The bids or offers may be any trade type. These may includeall-or-none (AON), limit order (LMT), market order (MKT),market-if-touched (MIT), stop-order (STP), etc. More common in gaming issubmitting a market order as a first bid or offer and then canceling andreplacing the market order with a limit order. A market order buys orsells at the current trading price while a limit order buys or sells ata stated price or better off the current market.

[0010] In view of the foregoing, it would be desirable to providesystems and methods for controlling a trader's ability to manipulateelectronic trading markets.

SUMMARY OF THE INVENTION

[0011] It is an object of this invention to provide systems and methodsfor controlling a trader's ability to manipulate electronic tradingmarkets.

[0012] For background purposes only, a trading interface for anelectronic trading system that may be used in accordance with thepresent invention is illustrated in Kirwin et al. U.S. patentapplication Ser. No. 09/745,651, filed Dec. 22, 2000, which is herebyincorporated by reference herein in its entirety.

[0013] In accordance with this invention, a variety of approaches tocontrol gaming during electronic trading may be used. One approachcompares a price difference between two bids or offers. A secondapproach manipulates the bid-offer and trade-state timers.

[0014] More particularly, the price approach may compare the prices ofthe new and old bids or offers by a trader upon receiving a request toreplace a bid or offer. If the change in price is greater than somepredetermined value set by the trading system, the trading system mayonly permit the bid or offer to be replaced by first entering a “coolingoff” period. During this cooling off period, any attempt to sell or buyin response to the bid or offer may be suspended. In this way, a newtrader has an opportunity to see the price change before submitting asell or buy command. As an alternative, if the change in price is toogreat, the new bid or offer may be automatically removed from themarket.

[0015] The time approach links the timeout of the bid-offer timer to theend of the trade-state timer, rather than the time when a bid or offerwas submitted. In this approach, the bid-offer timer may be programmedto count down upon completion of the trade-state timer if a currentworker submitted a bid or offer during the trade state. During thistime, a new trader (seller or buyer) may respond to the bid or offer,and the current worker cannot cancel or replace the bid or offer duringthe trade-state timer or during the bid-offer timer.

BRIEF DESCRIPTION OF THE DRAWINGS

[0016] The above and other objects and advantages of the invention willbe apparent upon consideration of the following detailed description,taken in conjunction with the accompanying drawings, in which likereference characters refer to like parts throughout, and in which:

[0017]FIG. 1 is a hardware implementation of an exemplary embodiment ofan electronic trading system in accordance with the present invention;

[0018]FIG. 2 illustrates a detached trading view of a market cellcontaining a bid in accordance with the present invention;

[0019]FIG. 3 illustrates a detached trading view of a market cell when atrader has gamed the market in trading systems prior to the presentinvention;

[0020]FIG. 4 illustrates a detached trading view of a market cell when aseller responds to a bid in accordance with the present invention;

[0021]FIG. 5 is a flow diagram of an exemplary embodiment of a priceapproach in accordance with the present invention; and

[0022]FIG. 6 is a flow diagram of an exemplary embodiment of a timingapproach in accordance with the present invention.

DETAILED DESCRIPTION OF THE INVENTION

[0023] The present invention provides systems and methods forcontrolling gaming in electronic trading systems. One approach involvesdetecting a change in price between two bids or offers by the sametrader and suspending trading for a predetermined amount of time if theprice difference is too large, or removing the new bid or offer from thetrading system. Another approach involves preventing a trader fromcanceling or replacing a bid or offer for a predetermined amount of timeby linking the timers associated with entry and modifications of bid,offer, sell, and buy commands.

[0024]FIG. 1 illustrates one embodiment of an electronic trading system10 according to the present invention. As shown, system 10 may includeone or more user computers 12, each of which may include a mouse 22,that are connected by one or more communication links 14 and a computernetwork 16 to a trading server 18.

[0025] In system 10, trading server 18 may be a processor, a computer, adata processing device, or any other suitable server. User computer 12may be a computer, processor, personal computer, computer terminal,personal digital assistant, a combination of such devices, or any othersuitable data processing device. Mouse 22 may be any suitable pointingdevice capable of receiving user input. Computer network 16 may be anysuitable network, including the Internet, an intranet, a wide areanetwork (WAN), a local area network (LAN), a wireless network, a digitalsubscriber line (DSL) network, a frame relay network, an asynchronoustransfer mode network (ATM), a virtual private network (VPN), etc.Communication links 14 may be any suitable communication links forcommunicating data between user computers 12 and trading server 18, suchas network links, dial-up links, wireless links, hard-wired links, etc.

[0026] All trading interactions between user computers 12 preferablyoccur via computer network 16, trading server 18, and communicationlinks 14. Traders at user computers 12 may conduct trading transactionsusing mice 22, keyboards, or any other suitable devices.

[0027] FIGS. 2-4 illustrate market cells that may be displayed on a usercomputer 12 in accordance with the present invention. A market cell mayinclude indications of the item to be traded, pending bids and/or offersfor the item, the last trading price, and a field for entering tradecommands. For ease of description, FIGS. 2-4 will be described in termsof bids although the same applies for offers as well.

[0028]FIG. 2 illustrates a detached trading view of a market cell 50containing a market order bid entered by a trader for an item. As shown,a symbol 52 for the item to be traded (e.g., usg-5y) may be indicated.As also shown, the trader may have entered a market order bid 56 havinga price of 98.21 for $10 million in 5 year bonds as well as a limitorder bid 58 having a price of 98.14 for the same amount. The lasttrading price 60 for the item (e.g., 98.222) may also be indicated.“Command Line” 64 may be used by a trader to enter a bid, offer, sell,buy, cancel, or replace command, or any other suitable command. Thesecommands may be entered using text, using dedicated buttons, or usingany other suitable approach to execute trade commands.

[0029]FIG. 3 illustrates a detaching trading view of market cell 100after a trader has gamed the market. Using the existing electronictrading system, a trader can manipulate the timers to replace marketorder bid 56 in FIG. 2 with the limit order bid 102 (bid 58 in FIG. 2)having a price of 98.15. Unaware of this change, a seller thinks he orshe is responding to the 98.21 bid when he or she is actually respondingto the 98.15 bid. The new price is indicated in last price column 106.

[0030]FIG. 4 illustrates a detached trading view of a market cell 150when a trader tries to cancel or replace bid 56 prior to a sellerresponding to the bid. Under the present invention, a trader who triesto cancel or replace a bid will either be prevented from changing thebid for a predetermined time period or trading for the item will besuspended, giving a potential seller notice of the new bid.

[0031] If a bid cannot be canceled for a predetermined time period, aseller may hit the bid as indicated by indicator 152. As shown, theseller has sold $10 million of usg-5Y at a price of 98.21. The newtrading price is reflected in the last price column 156.

[0032]FIG. 5 is a flow diagram of a price approach to prevent gaming inaccordance with the present invention. Process 200 begins at step 202with one or more bids or offers already entered in the trading system. Abid or offer can be a market order, a limit order, any other type oforder, or any combination of orders. At step 204, the trading system mayreceive a request to cancel or replace a bid or offer. Next, at step206, the trading system may determine whether the trader has more thanone order for the same item.

[0033] If the trader has more than one order, the trading system takessteps to prevent possible gaming. At step 208, the trading systemcancels the first bid or offer and replaces it with the second bid oroffer. Next, at step 210, the trading system compares the price of thecanceled bid or offer with the new bid or offer. If the price change inthe bids or offers is greater than some delta (e.g., {fraction(1/32)}nd, or any other suitable price difference), process 200 moves tostep 212 where a cooling off period timer starts. During this coolingoff period, if the trading system receives a request to sell or buy atstep 216, the sell or buy order is suspended at step 218 to give theseller or buyer notice of a change in bid or offer price.

[0034] After suspending the sell or buy order, or if the trading systemhas not received a request to sell or buy, process 200 checks whetherthe cooling period has ended at step 220 and if not, process 200 movesback to step 216. The cooling off period may last any suitable amount oftime (e.g., 2 seconds). If the cooling period has ended at step 220, thenew bid or offer is updated on the trading system and a seller or buyercan respond with a hit or lift at step 222. Once a hit or lift isreceived, a trade occurs and process 200 ends at step 224.

[0035] If the price change in bids or offers at step 210 is not greaterthan the predetermined delta, process 200 moves to step 226 where thetrading system checks for a request to sell or buy. If there is arequest to sell or buy (i.e., a seller or buyer responds with a hit orlift response) at step 228, then a trade occurs and process 200 ends atstep 230. Process 200 may also end at step 230 immediately after step226 if there is no request to sell or buy.

[0036] If the trading system determines that a user does not have morethan one bid or offer for the same item at step 206, process 200 cancelsthe bid or offer at step 232. Since the trader no longer has a bid oroffer in the market, process 200 ends at step 234.

[0037]FIG. 6 is a flow diagram of a timing approach to control gamingaccording to the present invention. Process 300 begins at step 302 bystarting a trade-state timer. At this point, the trading system for aparticular item has entered a trade state. During this trade stateseveral events may occur. One event may be a request to cancel orreplace a current bid or offer at step 306. If this occurs, the traderwill be prevented from canceling or replacing the bid or offer, and apop-up window may be displayed on the trader's screen indicating that heor she cannot cancel or replace the bid or offer until the trade stateis over at step 308. A second event may be a request to submit a hit ortake at step 307. If this occurs, a second trader will be able to submita hit or take in response to the bid or offer at step 309. Then at step311, the trading system will reset the trade-state timer. A third eventmay be a request to submit a bid or offer at step 310. If this occurs, atrader will be able to submit a bid or offer at step 312. If the tradercurrently has a bid or offer in the market, submitting a new bid oroffer will not replace or cancel the existing bid or offer.

[0038] After step 308, 311, or 312, or directly after step 302 (if noneof the requests indicated in steps 306, 307, and 310 are made), process300 moves to step 314 where the trading system determines whether thetrade-state timer has ended. If the trade-state timer has not ended,process 300 remains in the trade state to wait for a request to cancelor replace an order at step 306, a request to submit a hit or take atstep 307, a request to submit a bid or offer at step 311, or for thetimer to end at step 314. If the trade-state timer has ended, process300 moves to step 316 where the bid-offer timer starts. At this point,process 300 is in a bid-offer state. During the bid-offer state (e.g., 4seconds or any other suitable time period), one of several things canoccur. If process 300 receives a hit or lift response from a seller orbuyer, a trade will occur at the bid or offer price made during thetrade state at step 324. Process 300 will then end at step 326.

[0039] During the bid-offer state, process 300 can receive a request tocancel or replace an order at step 320. If this occurs, similar to thetrade state, the trader will be prevented from canceling or replacingthe order, and a pop-up window, or any other suitable method, may beused to communicate this message to the trader at step 322.

[0040] After step 322, or directly after step 316, process 300 maydetermine whether the bid-offer timer has ended at step 328. If thetimer has not ended, process 300 may remain in the bid-offer state towait for a request to cancel or replace a bid or offer at step 320, fora hit or lift response at step 324, or for the timer to end at step 328.If the bid-offer timer has ended, process 300 may then receive a requestto cancel or replace an order at step 330. If such a request isreceived, the bid or offer will be canceled and will be replaced by anew bid or offer at step 332. Process 300 may then end at step 334.

[0041] Gaming may be controlled to prevent as well as to promote gaming.Gaming may be promoted by creating liquidity in an illiquid market(e.g., by controlling and encouraging gaming to whatever degree themarket will permit). An example for increasing liquidity may be to takean illiquid security, such as an old bond (e.g., 30 year United StatesTreasury bond), and permit gaming so that trades increase. The permittedsale may be based on a sliding scale of various elements that arecontrolled. The permitted sale may also occur by permitting the trade toincrease until a specific volume is attained, or by generally permittinggaming for specific securities (such as the old bond) in illiquidmarkets.

[0042] Thus it is seen that systems and methods are provided to controlgaming in electronic trading systems. One skilled in the art willappreciate that the present invention can be practiced by other than thedescribed embodiments, which are presented for purposes of illustrationand not of limitation, and the present invention is limited only by theclaims which follow.

What is claimed is:
 1. A method for controlling manipulation of anelectronic trading market by a trader comprising: receiving a request tocancel a first bid or offer; and suspending trading if a pricedifference between the first bid or offer and a second bid or offer isgreater than a price amount.
 2. The method of claim 1 further comprisingdetermining if a first trader has submitted both the first bid or offerand the second bid or offer.
 3. The method of claim 2 further comprisingcanceling the first bid or offer.
 4. The method of claim 3 furthercomprising indicating that the first bid or offer was canceled.
 5. Themethod of claim 3 further comprising replacing the first bid or offerwith the second bid or offer.
 6. The method of claim 5 furthercomprising enabling the second bid or offer to be traded.
 7. The methodof claim 1 wherein the price amount is determined by the electronictrading system.
 8. The method of claim 1 further comprising allowing asecond trader to respond to the second bid or offer if the pricedifference is less than the price amount.
 9. The method of claim 1wherein suspending trading comprises preventing a second trader fromresponding to the second bid or offer.
 10. The method of claim 9 whereinsuspending trading further comprising setting a cooling off period. 11.The method of claim 10 further comprising allowing the second trader torespond to the second bid or offer upon completion of the cooling offperiod.
 12. A method for controlling manipulation of an electronictrading market by a trader comprising: providing an exclusive tradingperiod wherein only a first trader may submit a bid or offer and asecond trader may submit a hit or take; and automatically providing abid-offer period upon completion of the trading period.
 13. The methodof claim 12 further comprising preventing the first trader fromcanceling or replacing the bid or offer.
 14. The method of claim 12wherein providing the exclusive trading period further comprisesallowing the first trader to submit multiple bids or offers.
 15. Themethod of claim 12 further comprising restarting the exclusive tradingperiod upon the second trader submitting a hit or take.
 16. The methodof claim 12 further comprising preventing the first trader fromcanceling or replacing the bid or offer during the bid-offer period. 17.The method of claim 12 further comprising allowing the second trader torespond to the bid or offer with a hit or take during the bid-offerperiod.
 18. The method of claim 12 further comprising allowing the firsttrader to cancel or replace the bid or offer upon completion of thebid-offer period.
 19. A trading system that controls manipulation of anelectronic trading market by a trader comprising: a user computer thatreceives a request to cancel or replace a first bid or offer; and atrading server that provides a cooling off period when a pricedifference between the first bid or offer and a second bid or offer isgreater than a price amount.
 20. The system of claim 19 wherein theprice amount is determined by an electronic trading system.
 21. Thesystem of claim 19 wherein the cooling off period prevents a secondtrader from responding to a first trader's first bid or offer.
 22. Thesystem of claim 19 wherein the trading server allows a second trader torespond to the second bid or offer upon conclusion of the cooling offperiod.
 23. A system for controlling manipulation of an electronictrading market by a trader comprising: a trading server that provides anexclusive trading period wherein a first trader may submit a bid oroffer and a second trader may submit a hit or take, and a bid-offerperiod that starts automatically upon completion of the trading period.24. The system of claim 23 wherein the exclusive trading period preventsthe first trader from canceling or replacing the bid or offer.
 25. Thesystem of claim 23 wherein the trading period allows the first trader tosubmit multiple bids or offers.
 26. The system of claim 23 wherein thetrading server restarts the exclusive trading period upon the secondtrader submitting a hit or take.
 27. The system of claim 23 wherein thebid-offer period prevents the first trader from canceling or replacingthe bid or offer.
 28. The system of claim 23 wherein the bid-offerperiod allows the second trader to respond to the bid or offer with ahit or take.
 29. The system of claim 23 wherein the trading serverallows the first trader to cancel or replace the bid or offer uponcompletion of the bid-offer period.
 30. A me t hod for controllingmanipulation of a market comprising: receiving a request to cancel afirst bid or offer; and canceling the first bid or offer if the marketfor the bid or offer is illiquid.
 31. A market for controllingmanipulation of a market comprising: receiving a request to submit a bidor offer at any time to promote liquidity; providing an exclusivetrading period wherein only a first trader may submit a bid or offer anda second trader may submit a hit or lift once sufficient trading orliquidity has occurred in the market.